Tariffs aren’t an IRS tax, but they act like a tax-like cost that shows up in what many immigrants and visa holders pay for goods, and what import-reliant businesses spend to operate. The practical “law change” is the step-up in U.S. tariff rates that took hold during 2025, with a much higher average duty rate than the prior year. A New York Fed analysis of 2025 customs transactions found that most tariff costs did not stay abroad. They were largely absorbed domestically through higher importer costs and, in many cases, higher consumer prices. That point matters for tax year 2026 planning (returns filed in 2027) because duties often flow into inventory, cost of goods sold, and deductions.
“Tariff incidence” is the key concept here. It means who actually pays the tariff after prices and margins adjust. Even if a tariff is collected at the border from the importer of record, the real burden can shift. It can land on the U.S. importer, the foreign seller, the retailer, or the final customer. The New York Fed’s takeaway was that the burden was mostly domestic, with only a smaller portion showing up as lower foreign export prices. The details are best read as a trend: U.S. firms and U.S. households should plan as if tariffs raise the “all-in” price of imported inputs.
Before/After: what changed in 2025, and why it matters for 2026 taxes
| Item | Before (2024 environment) | After (2025 environment) | Why it matters for tax year 2026 (filed 2027) |
|---|---|---|---|
| Average tariff level on imports | Lower, baseline rates | Much higher average rates | Higher landed costs can raise inventory and COGS, affecting taxable income timing |
| Who bears most of the cost (incidence) | More mixed in many markets | Mostly borne domestically (per New York Fed) | Budgeting for households and import-heavy firms should assume U.S.-side pass-through |
| Compliance focus | Standard sourcing and pricing | More frequent price resets and surcharges | Contract terms and Incoterms can change who pays duty and when costs are recognized |
Who is affected most? In my experience, three groups feel this first. (1) Immigrant-owned small businesses that import apparel, electronics, beauty products, food ingredients, or auto parts. (2) Visa holders running e-commerce brands or Amazon storefronts that rely on overseas factories. (3) Households whose budgets are sensitive to retail price increases, especially for goods with fewer domestic substitutes.
The New York Fed also found the burden split moved during 2025. Early in the year, importers bore the clear majority of tariff incidence. Later in the year, exporters absorbed a bit more, but importers still carried most of the weight. That shift is common when contracts renew, exchange rates move, or competitors change pricing. If you buy on annual contracts, you may see a delayed effect. If you buy spot shipments, the pass-through can be faster.
The mechanics are straightforward but easy to miss. A tariff raises the “landed cost,” meaning the delivered cost after duty, freight, insurance, and brokerage. If the U.S. buyer has thin margins, they may raise prices. If competition is intense, the U.S. buyer may accept lower margins instead. If the foreign seller fears losing volume, they may discount the invoice price. The New York Fed’s data indicates U.S. firms were often stuck with the higher total bill, especially when substitute suppliers were limited.
For business owners, the contract details matter as much as the tariff rate. Watch the quote validity period, whether there is a tariff surcharge clause, and the shipping term (Incoterms) that decides who is importer of record. For example, with DDP (Delivered Duty Paid), the seller is supposed to cover duties, but they may bake the cost into a higher sales price. With DAP/FOB, the U.S. buyer commonly ends up paying duty directly. Either way, the economic incidence can still land on the U.S. side.
This is where tax reporting becomes practical, not theoretical. For federal income tax, customs duties are generally part of the cost of acquiring inventory or merchandise. Many businesses include duties in inventory costs and recover them through cost of goods sold when items are sold. Others may have different timing depending on their accounting method and the uniform capitalization rules. IRS guidance on accounting methods and inventory costing is found through IRS publications and forms available at forms and publications.
⚠️ Warning: Don’t treat tariffs like a simple “miscellaneous expense” without checking your inventory and capitalization rules. Misclassifying duties can distort COGS and taxable income.
The policy context matters because tariffs are often described as paid by foreign countries. The New York Fed’s results line up with the mainstream view that tariffs are frequently passed through domestically through prices and margins. For households, that looks like higher shelf prices over time. For small businesses, it looks like margin pressure and more cash tied up in inventory. Thinking of tariffs as “somebody else’s cost” can lead to underpricing and under-withholding cash for quarterly estimated taxes.
Tariff revenue also rose sharply in 2025. Revenue is not the same as incidence. It mainly reflects the combination of import volumes, tariff rates, enforcement, and what goods are being imported. Revenue can rise even when companies shift sourcing, because higher rates can outweigh lower volumes, or because import values rise. For consumers, higher revenue years often coincide with more noticeable price pressure in exposed categories such as apparel, electronics, and parts used in repairs.
For tax year 2026 planning, the action point is how these costs flow into your return. If you run a U.S. business (including as a resident alien under the substantial presence test), duties that raise inventory costs can change your taxable income timing. You might report on Schedule C (Form 1040), Form 1125-A, or a business return, depending on your entity type. If you are uncertain about residency, start with IRS Publication 519 at Publication 519 and the IRS international hub at international taxpayers.
The legal outlook adds another layer. The Supreme Court is expected to address the scope of tariff authority under federal emergency powers. No one should assume an outcome. But legal uncertainty can change business behavior now. Companies may renegotiate contract language, diversify suppliers, or adjust inventory timing to reduce exposure to sudden rate changes or reversals.
Transition rules are practical, even when the “change” is administered through tariff schedules and enforcement rather than the Internal Revenue Code. In customs practice, duty is generally determined at the time of entry and based on the classification, origin, and rate in effect. That means “grandfathering” often depends on what your contract says and when the goods legally enter the U.S. If you promised customers fixed pricing months ago, you may be stuck with the duty cost. If you have a surcharge clause, you may be able to pass through part of it after notice.
📅 Deadline Alert: For tax year 2026 (filed in 2027), start documenting duty and freight allocations now. Clean books are hardest to fix after year-end.
- Now (Q1–Q2 2026): Review supplier contracts for tariff-surcharge language and Incoterms. Confirm who is importer of record.
- All year (2026): Track duties as a distinct cost category, and confirm whether they are treated as inventory/COGS under your accounting method.
- Year-end (Q4 2026): Do an inventory and margin check. Consider pricing updates before peak sales periods.
- Filing season (2027): If you changed visa status or residency, confirm your filing status early using Publication 519. Bring duty records to your preparer.
⚠️ Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax situations vary based on individual circumstances. Consult a qualified tax professional or CPA for guidance specific to your situation.
